The concept of Supply Chain Management is relatively new and in this article we seek to provide a basic understanding of the origins and components of Supply Chain Management.
Supply Chain Management as a concept has been widely accredited to a Booz Allen consultant named Keith Oliver who in 1982 defined the concept as follows: “Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption”.
This seems to be the earliest published definition and therefore places the concept of Supply Chain Management at approximately 26 years old. We can see that “Supply Chain” without the “Management” is referenced in the definition, so we know that the general idea of a supply flow through a business was recognised prior to Olivers definition. What Oliver really captured was the conscious and deliberate control, integration, and management of the business functions contributing to, and affecting that supply flow through the business, for the purpose of improving performance, costs, flexibility etc, and for the ultimate benefit of the end customer.
The concept has been defined in simpler terms since that time and is often captured with five words: Plan, Source, Make, Deliver, Return.
Both of these definitions allude to a manufacturing origin but of course Supply Chain Management is as relevant to service, retail, distribution, and most other types of companies as it is to manufacturing.
The area of Supply Chain Management has enjoyed a meteoric rise in significance over the last twenty to thirty years as businesses have tried to establish advantage, and felt the pressure to keep up, in an increasingly homogeneous and competitive global business environment.
Japanese manufacturing companies brought great emphasis to the area of Supply Chain Management in the 1980’s and early 1990’s. Awareness of Supply Chain Management tools such as “Just In Time” and “Kan Ban” spread rapidly and became globally accepted best practice amongst volume manufacturing businesses. Western businesses raced to keep pace with a rapidly changing environment, dragging their supply bases, and sometimes employees behind them.
At the same time companies like SAP and Oracle were developing the complex IT systems that would be essential for enabling large complex businesses to effectively integrate and managing the sub areas that combined to make complex supply chains.
Of course the elements of Supply Chain Management have always existed in business. What changed was the willingness of businesses to recognise the inter-relationship of the various sub areas, and to pursue the benefits generated through coordination and integration, both from a strategy / planning perspective and operationally.
The sub areas comprising a supply chain include:
- Forecasting / Planning
- Purchasing / Procurement
- Inventory Management
- Customer Service
Today, Supply Chain Management is an accepted term in our business glossary. However, it is difficult to find a standard model of Supply Chain Management operating in the business community. We continue to see variations on the theme. Some business will refer to and manage their supply chains in a coordinated and all encompassing fashion, including all of the sub areas defined above. Others will integrate some elements of the supply chain, for example purchasing and logistics and call this Supply Chain Management. Many will refer conceptually to Supply Chain Management, but only address it specifically at the general management level.
One area of confusion arises because Supply Chain Management is both a horizontal business function (i.e. managing the supply chain in a business), and a vertical industry sector (i.e. businesses involved in managing supply chains on behalf of their clients). A company like TDG operates as a supply chain services provider, within the vertical supply chain industry sector. But each of the clients serviced by TDG will employ supply chain staff within their business operating on a horizontal basis across their organisation. The “supply chain industry” sector as the vertical is often referred to, is largely restricted to transport and storage type operations. Distributing products on behalf of clients. Whereas, the horizontal supply chain functional areas encompass the entire supply chain spectrum across a business.
Supply Chain Management has matured from a compelling method of deriving competitive advantage, to a “ticket to ride”. Its is now a baseline expectation for any company wishing to compete in the 21st Century, and with that the professions and occupations comprising Supply Chain Management are now firmly entrenched in the armoury of essential business executives.
The sub areas comprising Supply Chain Management are defined further below:
Forecasting / Planning
All business need to forecast and plan. To look forward and predict what will be required in terms of resources and materials in order to deliver their product or service to their customer in a timely manner.
In this area we find activities such as demand planning, inventory planning, capacity planning etc
Purchasing / Procurement
The commercial part of the supply chain is purchasing. Otherwise known as Buying or Procurement. This is where a business identifies suppliers to provide the products and services that it needs to acquire in order to create and deliver its own service or product. Costs and terms of business are negotiated and agreed and contracts created.
Thereafter the suppliers performance and future contractual arrangements will be managed in this area.
This area of the business is sometimes referred to as purchasing, sometimes, procurement, buying, sourcing, etc. However, all titles relate to the acquisition of materials and services.
The difference between purchasing and procurement is largely academic as, whilst there is a theoretical difference between them, businesses use the titles interchangeably for the two variations of activity. You will for example find manufacturing companies with purchasing departments that are actually doing procurement roles, and you will find service based organisations with procurement departments but in fact doing purchasing roles. In its strictest definition purchasing is limited to the actual commercial transaction and no more, whilst procurement includes the wider elements of the acquisition, including logistics and performance management.
In its strictest definition logistics refers to the movement of goods or materials, whether inbound, through, or outbound.
In some manufacturing businesses forecasting and planning will be found within a logistics department, in other businesses logistics will be exclusively managing the movement and transportation of goods and materials.
Operations is a general management type activity ensuring that a business uses its resources effectively to meet its customer commitments. Usually referring to the conversion activity of the business, i.e. the point where the acquired resources and/or materials are converted into the product or service that the business is selling on to its customers.
Sometimes found within Logistics Management, or Demand Planning or Operations, Inventory Management typically takes responsibility for both the replenishment of physical stock, the levels of physical stock, and of course storage and issue of physical stock. Stock may be materials and goods sourced from suppliers, work in progress, or finished goods awaiting sale/dispatch.
Transport management can involve the control of a company owned fleet of vehicles, collecting, moving, or delivering materials and goods, or managing transport services sourced from a 3rd party transport provider.
Like transport management, warehousing can involve the control of company warehouse space, or managing warehouse space sourced from 3rd party providers.
Distribution involves the physical distribution of the company’s products to the sub-distributor or directly to the customer base. Typically this is a combined transport and warehousing operation, responsible for storing and delivering products to meet the customers needs. Again this combined activity will often be placed with a 3rd party service provider who will control and implement the processes.
Most people do not recognise customer service as part of supply chain management, but it is in fact the final piece in the jigsaw. Having taken the business inputs, created and delivered a product or service, the final element is to check that the customers expectations were achieved, and manage any actions necessary to meet your customer obligations and commitments.